Extensions show icons on several UI surfaces which are now being changed for Material Design. The following is probably not an exhaustive list:
a) 16px icon (used as that extension's page favicon, used in search chip for extensions like [1], etc.)
b) 19px page action icon
c) 19px browser action icon
Ideally in the MD world, the page and browser actions should be 16px while the search chip icon should be ~14px. We can scale down, but it won't look amazing.
[1] https://chrome.google.com/webstore/detail/omnibox-site-search/cckcidchbmodjccllbmegoignhmidncg

ok so to be a bit clearer. Chrome chip icons are 16x16 but built-in with a padding.
for extension, you are right that they should deliver 14x14 to have a satisfying padding if they design the icon full-bleed.

A small question I have about this as an extension developer: how are you going to communicate the change to extension developers?
Just monkey-patching the documentation will catch developers unaware and unable to prepare in advance.
Chromium-extensions group is not an effective channel to reach developers, seeing the amount of noise there and how well did it go for toolbar redesign announcement.
Also, this already rolled out to Linux stable (was that intended?), see https://bugs.chromium.org/p/chromium/issues/detail?id=612765 - so it's a bit late..

This is a fair point. We really do need a better way of communicating upcoming changes to developers. chromium-extensions@ is better than nothing, but is very noisy. Ideally, we'd at least be able to have a "What's new" and "Upcoming" section on the homepage of the documentation (and allow for people to subscribe to updates) or something similar. There's been some discussions around how we can do this, but nothing's definitive yet.

This change made the icons less legible.
1. A lot of extensions won't be updated to provide a 16px icon for the toolbar, so a distorted scaled-down version will be displayed. Many extensions simply work and are abandoned by their authors who moved on with their lives.
2. A 16x16px icon is too small, there's too little space to include nicely drawn details so many icons will look alike.
3. Since the icons are small and the overlayed infobadges cover parts of the icon there will be many users who have similar looking icons, so they'll have to examine carefully before clicking the one they need, losing their time.